EU ministers reach deal to boost Basel bank capital rules

European Union finance ministers agreed on a plan to force banks to hold more capital in a deal that gives the U.K. full powers to implement its so-called Vickers banking agenda.

U.K. Chancellor of the Exchequer George Osborne said at a meeting of EU finance ministers in Brussels he won assurances from other nations that the U.K. will be able to follow through on its banking agenda, which will force large retail banks to hold more capital than the minimum international standards. 

That broke a deadlock reached two weeks ago, when 16 hours of talks left ministers divided on whether countries would need to seek permission when imposing extra loss buffers.

"We are happy to accept there is a political agreement,?Osborne said during a public debate. "There will still be technical changes that need to be discussed."

Governments and lawmakers in the 27-nation EU face a January deadline to implement bank rules agreed on by the Basel Committee on Banking Supervision in the wake of the 2008 collapse of Lehman Brothers Holdings Inc. The measures, known as Basel III, would more than triple the core capital that banks need to hold to 7 percent of their risk-weighted assets.

Finance ministers agreed today on how to raise capital requirements for banking activities within the EU. They had previously agreed on a protocol for higher loss buffers for domestic and non-EU banking activity.

Under today's accord, member states can independently require their banks to set aside another buffer equal to 3 percent of risk weighted assets, provided the increase is applied across the entire region. In doing so, officials eliminated a proposal to allow affected host countries to seek binding mediation from the European Banking Authority.

This change allows the U.K. to move forward with its Vickers plan, prepared by experts and accepted by the government, which will force some lenders including HSBC Holdings Plc, Barclays Plc, Lloyds Banking Group Plc, Royal Bank of Scotland Group Plc, Santander U.K. Plc and Nationwide Building Society to hold core capital equivalent to 10 percent of their assets, weighted for risk.

Basel agreements must be implemented into nations?laws before they can come into effect. Today's deal will allow Denmark, which holds the rotating presidency of the EU, to begin negotiations on the draft law with lawmakers in the European Parliament.

"We're all in," Danish Economy Minister Margrethe Vestager said during the public debate. "I very much appreciate that," she said, adding that it will bolster her position in negotiations with lawmakers.

While the European Central Bank and the European Banking Authority supported the agreement, they warned that, in its current form, it may hand too much power to national regulators and undermine attempts to have a common EU rulebook for bank regulation.

"Perhaps the balance has tilted too much in the direction of too much flexibility," ECB Vice President Vitor Constancio said during the public debate. "There may be risks."

Andrea Enria, chairman of the EBA, also raised concerns that the revised text would allow national regulators to increase the risk weighting attached to residential and commercial mortgage loans, forcing banks to hold more capital.

"The possibility to alter risk weights is to be handled with extreme care," Enria said. There is already a perception in the market that risk weights are not consistent across different countries, he said.

Ministers today addressed Bulgarian concerns that banks may be forced to hold more capital against the country's sovereign debt. The overall arrangement also won support from the Netherlands, which had concerns about how they would have to apply the rules.

"For the Netherlands, good arrangements have been made to protect our special pension system," Dutch Finance Minister Jan Kees de Jager told reporters after the meeting.

The first round of talks between Denmark and members of the assembly is scheduled for May 23. Parliament, which approved its negotiation position on the law yesterday, is seeking to expand the scope of the rules to include limits on bonuses and a requirement for banks to draw up plans showing how they could be safely wound down if they failed.

The European Parliament's additions to the text mean that "There's still quite a long way ahead to go" before work on the legislation is finished, Osborne said. The U.K. is opposed to some of the changes made by the assembly, he said.

Osborne said before today's meeting that he would not accept any EU interference in the separate Vickers plans, prepared by a panel chaired by former Bank of England Chief Economist John Vickers. The measures would also require banks to build fire breaks between their consumer and investment banks. The plans will cost the industry as much 7 billion pounds ($11 billion), the Vickers panel has said. (Bloomberg)

The U.K. last week said the Vickers proposals will be included in its legislative agenda for the next 12 months. Osborne wants the plans fully approved by 2015 and implemented no later than 2019.

The Basel group brings together regulators from 27 nations including the U.S., U.K. and China to draw up prudential rules for banks.